Corporate Venture 101

Considerations for starting corporate VC programs

Rich Grant
Aug 6, 2019 · 9 min read

Image: Shutterstock

Co-authored by Ian Goldstein (Fenwick & West), Rich Grant (Touchdown Ventures) and
Gus Warren (Samsung NEXT)

Earlier this year, we organized and led a workshop at the Global Corporate Venturing &
Innovation Summit in Monterey, California to discuss best practices for starting and
running a corporate venture capital (“CVC”) program. This workshop was based on our
extensive collective experience organizing, operating, and advising a significant
number of CVC programs across industries and stages of development. We focused on
surfacing the various alternatives for structuring a corporate venture practice as well as
steps and considerations for implementation and execution of an effective CVC
investment program.

The goal for the presentation was not only to provide a general framework and
guidance for companies considering launching an internal corporate venture program
(or expanding an existing program), but also how to articulate to senior members of an
organization the strategic benefits of corporate venture investments.

A brief summary of the presentation and a few of the key takeaways follow. As we
noted in our presentation, this is a generalized summary and analysis — creating,
structuring and implementing a CVC investment program is much more complex due to
the need to develop and align the particular strategic elements of a CVC program with
the needs of a complex parent organization.

Selling CVC Internally

Every industry is threatened and affected by disruption. This is evident by the fact that
the average lifespan of companies listed on the S&P 500 decreased by 66% since 1960,
according to Innosight and Standard & Poor’s. As a result, nearly all executives believe
that innovation is a top priority for their corporations, with the vast majority
dissatisfied with the performance of their innovation programs (according to surveys
by PwC and McKinsey).

As the need for rapid innovation has increased, corporate venture capital has emerged
as a leading tool because it allows companies to explore external opportunities and
partner with external innovators, while still preserving the flexibility to bring such
innovations in-house at the appropriate time via R&D, business development and
acquisitions. Companies across diverse industries have increasingly embraced active
corporate venture capital investment programs, resulting in corporate participation in
$66B of venture investments across nearly 1,500 deals in 2018 (based on data provided
by NVCA and Pitchbook).

Corporate venture capital is primarily about innovation, competitive advantage and

survival. The 10+ year growth trend in CVC deals and investment dollars shown above
is not a reason to build or expand a CVC program, but such growth suggests that
corporations increasingly look to CVC to participate in the innovation and disruption
facing their respective industries.

For those seeking to obtain internal alignment and support for a new or expanded CVC
program, “following the herd” is of course not an adequate business rationale. But
understanding the underlying reasoning for the growth in CVC, the strategic benefits
corporations seek and obtain by operating dedicated CVC programs, and the different
ways in which a CVC program could be structured to provide strategic benefits to an
organization, are entry points for beginning to gather support for launching or
expanding a CVC program.

Building it Strategically
We discussed the importance of defining objective and quantifiable strategic goals in
determining the appropriate corporate and operational structure for any new corporate
venture fund. Building the appropriate structure for a CVC fund requires maximizing
both financial returns and strategic alignment with the company’s business needs,
including determining how closely the corporate venture fund will coordinate with
business units.
Operations and Decision Making
Key considerations include who will have ownership over investment processes, who
will run the fund operations on a day-to-day basis, and the level of autonomy the fund
will have relative to the larger parent organization. Certain funds are structured with
oversight from upper management or a specific parent business unit, while others
optimize strategic and financial decisions with a dedicated corporate venture team
along with participation from other stakeholders from the larger organization.
Similarly, on a day-to-day basis, certain funds assign management from the larger
organization, while others either hire an external team or have a combination of
internal and external managers to facilitate balanced financial and strategic alignment.
Autonomy also varies along a similar spectrum, with certain companies providing full
autonomy to the fund to make investments subject to defined parameters and
thresholds, while other companies provide more limited autonomy to identify and
negotiate proposed investments with a separate investment committee providing final
approval.

Size and Funding Commitment

Determining capital allocation and parameters for the number of investments and
investment period helps determine the size and structure of the program and team.
While considerations vary based upon the goals of the parent organization, it’s
important to align the size of the program with the expected stage of target
investments. For example, earlier stage investments generally require less capital
upfront and thus a smaller investment budget in the early years whereas later stage
investments generally necessitate larger upfront checks and thus a larger fund is more
appropriate for building a diversified portfolio.

Compensation and Performance Metrics

Compensation structures are important for attracting, retaining, and motivating an
effective investment team. Compensation for corporate venture teams traditionally tie
compensation to achievement of ROI objectives or other defined strategic metrics.
Defining key performance metrics is critical for strategic alignment between the
corporate venture fund and the parent entity. In addition to financial return, other
common metrics include number of targeted investments within a defined industry,
development of new commercial relationships between portfolio companies and parent
business units, and acquisitions of portfolio companies, either by the parent entity or
other third parties.
Legal Structure
Each of the above considerations contribute to determining the appropriate legal and
operational structure for a corporate venture capital fund. To help frame structure
decisions, we presented the following three common CVC fund structures:

1. Single Limited Partner: the graphic below reflects a traditional venture capital
structure, with the parent entity as a single limited partner with limited governance
rights and obligations. This fund can be structured to require investments within
defined parameters that align with the parent entity’s corporate strategy, but typically
operates with greater independence than other structures.

2. LLC Subsidiary: the graphic below reflects a structure whereby the corporate
venture fund acts as a wholly-owned subsidiary of the parent entity. In this scenario,
typically the investment team has some level of autonomy related to investing sourcing,
evaluation and execution, but will typically report to and seek approval from a separate
investment committee or executive team for certain investment matters.
3. Fully Integrated: the graphic below reflects a structure whereby the corporate
venture team consists of investment professionals working directory for the parent
entity, with each investment requiring specific support from a specific parent business
unit.

Running it Effectively
Running an effective CVC investment program requires the implementation of best
practices seen at long-established successful corporate venture capital funds. This
includes:

1. Setting up a CVC program with a clear investment thesis that aligns with the
strategic objectives of the parent company;

2. Building the investment infrastructure of team members and internal/external

support structures; and

3. Developing a robust deal pipeline and process to evaluate, close and manage
investments.

We also discussed the importance of effective internal and external communication.

Internal communication, regardless of fund structure, incorporates day-to-day

messaging with the investment team as well as periodic but consistent communication
with the parent entity, both through an investment or advisory committee and the
executive team. Successful funds develop a cadence of weekly internal meetings to
discuss management of the deal pipeline, execution and portfolio management, as well
as monthly or quarterly meetings with the investment committee to and/or the
executive team to discuss investment strategies and goals for transferring key learnings
and insights to the parent’s core business.

External communication includes external promotion of the fund’s practices as well as

ongoing active involvement with portfolio companies. Successful funds develop a
comprehensive external messaging plan, including an investment mission and outreach
plan to connect with startups and other members of the related ecosystem. Creating
and delivering a comprehensive outreach plan will add credibility to the fund, reinforce
support from the parent entity as well as drive deal flow and key relationships.
Successful funds also strive to be a valuable investor to their portfolio companies,
including Board meeting attendance and ongoing advisory roles as well as help with
internal and external business development.

Of course, running an effective CVC investment program requires discipline in

developing and managing a quality deal pipeline. We discussed how different CVC
programs network in a particular industry ecosystem, develop a qualified deal pipeline,
complete the vetting process to qualify companies as potential investments ,and then
compete to win deals. We also discussed the importance of CVC programs positioning
themselves for success by ensuring that their organizations can move through the deal
process at customary “venture speed.”

A Final Thought
A final thought that we shared and discussed at our workshop is the often-overlooked
strategic assets that CVC programs bring to their portfolio companies vis-à-vis their
venture capital peers. These include a broader depth of non-financial resources, the
ability to be a customer or other collaboration partner, and often a longer investment
time horizon. The best CVC programs use these strategic assets to the benefit of their
portfolio companies, which can help de-risk investment opportunities and bring greater
strategic benefit to the parent company. When building a new CVC program, begin with
the mindset of “paying it forward.” This approach can help build trust and support,
which are critical elements for setting the fund up for success, both strategically and
financially.

. . .

. . .

Rich Grant is a co-Founder of Touchdown Ventures, a Registered Investment Adviser, that

manages venture capital funds for corporations. The authors would also like to thank Mike
Devlin, Ryan McRobert, Selina Troesch, and Scott Lenet for their contributions to this
article.

Unless otherwise indicated, commentary on this site reflects the personal opinions,
viewpoints and analyses of the author and should not be regarded as a description of
services provided by Touchdown or its affiliates. The opinions expressed here are for general
informational purposes only and are not intended to provide specific advice or
recommendations for any individual on any security or advisory service. It is only intended
to provide education about the financial industry. The views reflected in the commentary
are subject to change at any time without notice. While all information presented,
including from independent sources, is believed to be accurate, we make no representation
or warranty as to accuracy or completeness. We reserve the right to change any part of